The distraction effect of non-audit services on audit quality

Regulators have expressed concerns that an emphasis on non-audit services (NAS) could distract from the audit function, even for clients with minimal NAS purchases. Motivated by this concern, we examine whether a greater emphasis on providing NAS to audit clients generally (i.e., not to a specific client) can distract from the audit function, thus reducing audit quality. We find evidence of an NAS distraction effect, where a greater emphasis on NAS at the audit office-level results in more client financial statement restatements, even after controlling for client-specific NAS. Further, the association exists among clients that purchase minimal NAS, suggesting that this association relates to distraction effects in addition to independence issues examined in prior research. This study should be of interest to audit firms, audit committees, and regulators because it provides new evidence regarding issues related to a business model that includes both audit and non-audit services.     

Advertising spending patterns and competitor impact

In most industries, brand managers do not advertise continuously. Instead, advertising is switched on and off systematically, a phenomenon often referred to as pulsing. Moreover, spending levels vary considerably across periods when brands do advertise. Surprisingly, this variety in advertising spending patterns as observed in practice, as well as competitor impact on these patterns and their sales outcomes, have received relatively little empirical attention. In this paper we focus on two core aspects of observed advertising patterns: incidence and magnitude. Insights are based on the analysis of advertising spending for 370 CPG brands in 71 product categories over a four-year period. We also collected feedback from practitioners dealing with advertising across a wide range of firms. We first empirically establish that pulsing is the dominant form of advertising scheduling. Observed patterns, in turn, are largely driven by television and print advertising. Next, we show that, after accounting for a wide range of other possible drivers, advertising in-sync with competitors is more common than out-of-sync. However, the results suggest that competitive reasoning plays only a relatively minor role in advertising decisions. Finally, we show that, across a wide range of real-world scenarios, investing in top-of-mind awareness through maintenance advertising insulates brands from competitors' actions and boosts sales.     

The impact of large tax settlement favorability on firms’ subsequent tax avoidance

Review of Accounting Studies - I consider how large tax settlements compare to management expectations and then test how the favorability of a resolution (from the firm’s perspective) affects...     

PRICE‐ADMISSIBILITY CONDITIONS FOR ARBITRAGE‐FREE LINEAR PRICE FUNCTION MODELS FOR THE TERM STRUCTURE OF INTEREST RATES

To assure price admissibility—that all bond prices, yields, and forward rates remain positive—we show how to control the state variables within the class of arbitrage‐free linear price function models for the evolution of interest rate yield curves over time. Price admissibility is necessary to preclude cash‐and‐carry arbitrage, a market imperfection that can happen even with a risk‐neutral diffusion process and positive bond prices. We assure price admissibility by (i) defining the state variables to be scaled partial sums of weighted coefficients of the exponential terms in the bond pricing function, (ii) identifying a simplex within which these state variables remain price admissible, and (iii) choosing a general functional form for the diffusion that selectively diminishes near the simplex boundary. By assuring that prices, yields, and forward rates remain positive with tractable diffusions for the physical and risk‐neutral measures, an obstacle is removed from the wider acceptance of interest rate methods that are linear in prices.     

Consumer credit-risk models via machine-learning algorithms

We apply machine-learning techniques to construct nonlinear nonparametric forecasting models of consumer credit risk. By combining customer transactions and credit bureau data from January 2005 to April 2009 for a sample of a major commercial bank’s customers, we are able to construct out-of-sample forecasts that significantly improve the classification rates of credit-card-holder delinquencies and defaults, with linear regression R²’s of forecasted/realized delinquencies of 85%. Using conservative assumptions for the costs and benefits of cutting credit lines based on machine-learning forecasts, we estimate the cost savings to range from 6% to 25% of total losses. Moreover, the time-series patterns of estimated delinquency rates from this model over the course of the recent financial crisis suggest that aggregated consumer credit-risk analytics may have important applications in forecasting systemic risk.     

Financing agricultural R&D in rich countries: what's happening and why

Governments everywhere are trimming their support for agricultural R&D, giving greater scrutiny to the support that they do provide, and reforming the public agencies that fund, oversee, and carry out the research. This represents a break from previous patterns, which had consisted of expansion in the public funds for agricultural R&D. Private-sector spending on agricultural research has slowed along with the growth of public spending in recent years, but the balance continues to shift towards the private sector. This article presents a quantitative review of these funding trends and the considerable institutional changes that have accompanied them. We discuss new data for 22 OECD countries, providing institutional details for five of these countries, and conclude with an assessment of policy developments.     

‘The Magnificent 7[am]?’ Work‐life articulation beyond the 9[am] to 5[pm] ‘norm’

This article focuses on the work‐life ‘balance’ challenges of those who work in organisations that operate beyond standard hours. The concept of work‐life articulation is utilised to examine the experiences and practicalities of attempting to reconcile the, often competing, demands of employment and family life. Qualitative research was conducted in two private sector businesses and one‐third sector organisation in the UK during the onset of the 2008 financial crisis. The findings reveal increasing competitive pressures, efficiency drives and work intensification. ‘Business needs’ are prioritised over care responsibilities, and in the private sector organisations there is declining flexible working with a reassertion of the management prerogative. This article contributes to current debates over work‐life ‘balance’ and highlights variable, changeable and unpredictable working time arrangements that permeate non‐standard hours, which creates additional complexities and challenges for family time schedules and routines.     

SIR WALDRON SMITHERS AND THE MUDDLE OF THE TORY MIDDLE

Waldron Smithers was highly critical of Attlee's post‐war Labour government and placed much weight on Hayek having dedicated The Road to Serfdom to ‘the Socialists of all parties’. Accordingly, Smithers was assiduous in combating what he saw as a dangerous turn towards middle‐way policy within his own party in the late 1940s.